February 2005
Volume 1, Number 2
Table of Contents

Borrower’s Checklist for Negotiating the Commercial Real Estate Financing Commitment Letter
By Kathleen J. Hopkins

In a commercial real estate financing, a commitment letter is a binding contract – it is a contractual commitment by the Lender to loan money on the terms stated in that document with the borrower paying a commitment fee as consideration for the contract. As such, this is the time borrower should engage its lawyer; and take the time necessary to negotiate BOTH business and legal terms important to it in the commitment letter. This is particularly important in dealing with national lender and on conduit (securitized) loans; where the loan document may be pretty much set in “concrete” if a term was not negotiated in the letter of intent.

With that in mind; the “usual” elements of the commitment letter will be:

  • whether loan is recourse or lender’s remedy limited to the collateral
  • length of the loan,
  • interest rate (if not locked, how and when to lock it, and whether there is a charge for locking it),
  • amortization of payments ( eg: 5 year term, but with principal and interest installments reflecting a 30 year amortization; thus a balloon payment due end of yr 5)
  • guarantor – full, partial, carve-out,
  • prepayment (whether permitted) and if so, full or partial, and whether any premiums are due upon a prepayment,
  • commitment and loan fees,
  • payment of lender’s expenses

In addition to the usual terms; savvy borrowers and their counsel should consider establishing the following terms in their commitment letters:

  • interest: will it be calculated on actual days or 30 day months?
  • secondary financing: Consider if the borrower needs or envision a second position deed of trust or a loan secured by the ownership interest in the borrower (aka mezzanine financing). If so, spell it out here so they are excepted from the “due on sale” clause in the note or security instruments.
  • tax and insurance escrows: can be abated until there is a default?
  • insurance requirements:
    • this is a long lead time item , may want to get insurance requirements established and confirm the borrower is able to satisfy them before executing the commitment and paying the commitment fee
    • is earthquake, terrorism, flood or other odd or expensive insurance required?
    • how much and why types of insurance coverage must borrower obtain?
    • what is rating for insurance carrier? (watch for unreasonably high Best rating)
    • can borrower self insure, part of larger policy?
  • Tenant Estoppels and SNDAs (tenant subordination and nondisturbance agreements):
    • another long lead time item: might want to get those before you even sign the commitment letter
    • important note: the borrower/landlord must disclose any unusual termination rights its tenants have up front, before executing the commitment – often lenders will revise the deal if there is a possibility the tenant(s) can terminate early!
    • what will be required – get form and review it!
    • will lender accept form already approved in leases?
  • recourse vs. non-recourse liability: if this is a non-recourse loan ( i.e. the lender’s recourse is limited to taking the collateral), there will be certain carveouts that trigger borrower (and/or guarantor) liability in addition to the collateral; do not be satisfied with “standard carveouts” in a commitment letter; require them to be listed in detail, as they may be untenable to the borrower or the guarantors!
  • guarantor:
    • full, partial or carveout liability?
    • liability for environmental and/or building code indemnities provided by borrower?
    • will there be an event of default upon guarantor’s death or bankruptcy? (or a substitute identified)
    • will there be restrictions on transfer of guarantor’s assets?
  • extension: is there a provision to extend commitment date if you need it? a fee?
  • expenses: can you cap lender’s legal fees? can you limit charges assessed by the lender for post closing items such as administration of escrow accounts?
  • assignment/assumption: can there be a 1x assumption by acceptable borrower for a fee? interest rate stay same? what criteria for the transferee?
  • partial releases: are there multiple parcels of collateral being pledged, do you want some of them released as the loan balance gets paid down; add it now
  • late charges, default interest, cure period: consider asking for small late charges (flat dollar amount), default interest; and cure periods will want to ask for 5-10 days (after notice if possible) for monetary defaults and 15-30 days for non-monetary (but with extended time if cannot be cured within 30 days)
  • title insurance:
    • are their oddities regarding title you need waived or endorsed around now? Bring up before paying non-refundable commitment fees .
    • Ask for surveyor’s certification now, another long lead time item will need to get working on before commitment signed
  • opinion letter:
    • can you get it limited to authority and due organization?
    • enforceability not give lender very much and makes it expensive; will it include usury? ucc?
    • will it include an opinion on zoning?
    • for big loans ($20million or more) may also need bankruptcy remote opinion (very expensive to give)
  • confidentiality: request confidentiality of financial information; fact of loan negotiations; in loan documents moving most information to unrecorded documents instead of deed of trust (eg release prices for parcels)
  • post-closing access: for biotech and other trade secret industries, may want to spell out confidentiality access agreement now
  • other lender due diligence: get spelled out what the lender will be looking at and spending borrower’s money to get:
    • surveys
    • appraisals
    • environmental assessments
    • review of entity documents, consents
    • financial statements of borrower, guarantor (confidential)
    • UCC searches

There will be other deal specific or property specific provisions to be covered, and the prudent borrower will consider carefully the issues relating to its project before it initiates negotiating loan documents, including the commitment letter.

Kathleen J. Hopkins is a founding member of the Seattle, Washington law firm: Real Property Law Group, PLLC. Kathleen limits her practice to commercial real property transactions, finance, commercial leasing and related bankruptcy issues. Kathleen chairs the ABA General Practice Section Real Estate Committee.

 

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